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The Fed's 2012 predictions: right or wrong?

Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Posted: March 5, 2013
Research-center

min read

At the beginning of 2012, the Federal Open Market Committee (FOMC) made public the financial projections on which it was basing its monetary policy decisions. Now that most year-end data for 2012 is available, it's time to look at how accurate the Fed's predictions were -- and what it thinks is in store for 2013.

These are more than just your average economic forecasts. The FOMC is a big reason why current mortgage rates are so low and why rates on savings accounts have all but disappeared. There are winners and losers from Fed policy, and the effectiveness of FOMC decisions plays a major role in determining the progress of the economy.

All of this starts with the economic projections -- the outlook the FOMC has in mind when it makes its monetary policy decisions. In early 2012, MoneyRates.com decided to hold the Fed accountable by tracking how economic reality meshed with what the Fed had predicted for 2012 -- a Fed Reality Check.

So how good were the FOMC's predictions for 2012?

Grading 2012

The FOMC projections focused on three major areas: economic growth, unemployment and inflation. Here's a look at what the Fed predicted at the start of 2012, and how the reality turned out:

GDP Growth. The Fed predicted that real GDP growth for 2012 would be between 2.2 and 2.7 percent. Based on advance estimates for the fourth quarter of last year, real GDP growth for 2012 was 2.2 percent - just barely within the Fed's range.

Unemployment. The Fed predicted the unemployment rate would fall in a range of 8.2 to 8.5 percent. Fortunately, this turned out better than the Fed expected, as unemployment ended 2012 at 7.8 percent.

Inflation. Rather than the more widely followed Consumer Price Index, the Fed focuses on the Price Index for Personal Consumption Expenditures (PCE) to measure consumer inflation. The Fed predicted this would increase in a range of 1.4 to 1.8 percent for 2012, and the actual number was 1.5 percent.

So, it was a close call on GDP, but overall the Fed got two out of three predictions right.

Predicting 2013

Looking ahead to the rest of 2013, here's what the Fed forecasts:

Real GDP growth between 2.3 and 3.0 percent.

Unemployment between 7.4 and 7.7 percent.

PCE price increases between 1.3 and 2.0 percent.

Overall, the Fed made reasonably accurate predictions for economic conditions in 2012. That's different from saying that the FOMC made the right decisions based on those predictions. It remains to be seen whether its extreme low-interest-rate policies will succeed in stimulating the economy, or whether it is simply creating additional problems by encouraging debt, building asset bubbles and robbing savers of income.

So how will the Fed do in 2013 in terms of its economic projections, and more importantly, in formulating the right policies to improve the economy? Stay tuned to find out. MoneyRates.com will continue to update the Fed Reality Check throughout the year.

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